A company acts through two bodies of people – its shareholders and its directors.
The directors of a company oversee the day-to-day management of the business; ordinarily they make strategic and operational decisions on behalf of the company, and they are responsible for ensuring that the company meets its statutory obligations.
The Companies Act 2006 sets out several statutory fiduciary duties with which a director must comply. These are as follows:
A director must:
- Act within the powers afforded to them under the company’s constitution
- Promote the success of the company for the benefit of its members
- Exercise independent judgment
- Exercise reasonable care, skill and diligence
- Avoid conflicts of interest
- Not accept benefits from third parties; and
- Declare interest in proposed or existing transactions or arrangements with the company
Whilst, as above, the directors ordinarily have a duty to shareholders, if a director knows that the company has, or is likely to, become insolvent (or insolvency is probable), their duties change from acting in the best interests of the company, to prioritising the company’s creditors. This was confirmed in the well known case of BTI v Sequana SA and others. This is a sliding scale – the greater the company’s financial difficulties, the more the directors should prioritise creditors’ interests.
Where insolvency becomes inevitable, the creditors’ interests become paramount. Before the company reaches this stage, its directors should balance the interests of shareholders and creditors, taking any implications on the company into account. The financial position of the company in question will need to be assessed and it may be that professional advice from an insolvency practitioner is required.
The directors of a company must have a sound understanding of the company’s financial position and when there may be insolvency related concerns. Whilst a director cannot usually be held personally liable for the debts or losses of a company, there are a number of claims that can be brought against a director personally should they fail to comply with their duties. These include:
- Wrongful trading – where a director allows a company to continue trading even though it is clear that the company is heading towards an insolvent liquidation.
- Fraudulent trading – for example, where a director has acted dishonestly in a deliberate attempt to disadvantage creditors, or business has been carried on in a fraudulent manner.
- Misfeasance – this involves an allegation that a director has breached their fiduciary duties thereby causing loss. One example of this might be if a director has acted contrary to the powers afforded to them under the company’s articles.
- Claims relating to transactions at undervalue, preferences or transactions defrauding creditors.
As can be seen, the duties of a director are wide and even if an individual has not been duly appointed as a director (a duly appointed director is known as a de jure director), such duties can still attach if that person assumes the responsibility of a director or otherwise acts as a director would (known as a de facto director). This may be particularly so if a certain individual is held out to be a director and makes decisions on behalf of the company. Working out if a person falls into this category involves an analysis of fact and it is the role that they assume rather than the title used which will be determinative.
A de facto director has the same statutory duties, authority, and powers to bind a company as a formally appointed director in law. A de facto director can therefore be found to be in breach of duty and held to be personally liable for any losses flowing from their breach – this is illustrated by the recent case of Lime & Black BPS Limited [2024].
Lime & Black BPS Limited [2024] involved a claim brought by Lime & Black BPS Limited (“the Company”), acting by its joint liquidators, against a number of parties – the principal allegation was that the directors had breached their duties by causing or allowing the Company to engage in VAT fraud. One of the defendants to the claim was Mr. Mistry and it was alleged (amongst other things) that he was a de facto director and therefore owed statutory and fiduciary duties to the Company under the Companies Act 2006. On the evidence, the judge determined that Mr. Mistry was indeed a de facto director based on his role, including that he had (a) been involved in the conception of the Company (b) had administered the workplace pension scheme and (c) had processed and authorised certain payments on behalf of the Company. The Court went on to find that Mr. Mistry had caused the Company loss and he should be personally liable for this.
Takeaways
It is paramount that directors (whether duly appointed or not) are aware of the scope of their duties and seek professional advice, when necessary, particularly if financial issues might be on the horizon. Failing to do so could otherwise have grave consequences. The case of Lime and Black BPS Limited also demonstrates the importance of having a clear governance structure and the risks of running a company with a high degree of informality.
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